Emerging market debt grinds tighter; Brazil up; Hungary's Mol to sell euro-denominated 10-year notes

By Reshmi Basu and Paul A. Harris

New York, Sept. 26 - Emerging market debt edged tighter Monday in light volumes, boosted by positive sentiment across the asset class.

The overall tone of the International Monetary Fund and World Bank meeting this weekend was "cautious optimism," reported an investor, who added that there is concern over valuations.

"But no one knows what will trigger a correction," he added.

Meanwhile in the primary market, Hungarian oil and gas company Mol RT revised price talk on its benchmark-sized euro-denominated 10-year fixed-rate senior unsecured to notes (BBB-) offering to mid-swaps plus 70 to 72 basis points from the 75 basis points area.

Pricing is expected to take place on Tuesday.

BNP Paribas and Dresdner Kleinwort Wasserstein are bookrunners for the Regulation S offering.

EM prices up

During the session, U.S. Treasuries were yanked lower on hawkish views by two Fed officials. Chicago Fed president Michael Moskow and Fed governor Susan Bies both said, in separate appearances, that the economy was in decent shape, despite the devastating Hurricane Katrina and now a more contained Hurricane Rita.

That raised speculation that the Fed would continue to raise interest rates. In response, the yield on the 10-year note rose to 4.29% from Friday's close of 4.25%.

However, emerging market debt saw slightly higher prices and tighter spreads, said a trader, who added that there "was not substantial playing" during the session.

With such low volume, there were also no major players, he observed.

The JP Morgan EMBI Global Diversified index was up 0.03% while its spread over Treasuries tightened by four basis points.

The Brazil bond due 2040 gained 0.15 to 121.35 bid. The Colombia bond due 2012 added 0.15 to 120.85 bid. The Russia bond due 2030 moved up a quarter of a point to 114 ½ bid. The Venezuela bond due 2027 added a quarter of a point to 115.55 bid.

Meanwhile, a market source said: "It was increasingly difficult to find value. Everything seems just way too overpriced," he noted.

"But the market is proving surprisingly resilient. Nothing can shake it down."

He added that he is nervous about the tight valuations and "that something must give."

Sources have credited strong liquidity into the asset class as the reason why the market has shown little reaction to shocks. In the last week, the JP Morgan EMBI Global index has tightened 11 basis points, according to another market source. The asset class has outperformed other classes, which have felt the sting of higher energy costs.

Nonetheless, flows into the market, while still strong, have been tapering off in the last few weeks. Perhaps this is because investors are beginning to worry about valuations, added the second market source.

The data from Emerging Portfolio.com Fund Research showed $68 million came into dedicated emerging market funds for the week of ending Sept. 23. That makes it 13 straight weeks of inflows. But the $68 million was 0.22% of assets, which is down from 0.51% reported the previous week and is less than half the year-to-date average of 0.52% of assets.

There was also a surge in new issues in the high-yield market, said the source. But junk had a hard time absorbing the supply under the weight of the heavy redemptions.

Therefore, the relative value gap between Latin American and U.S. corporate bonds over Latin American sovereign bonds continued to widen, according to the source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.